Russian automotive sector's struggle amidst sanctions and isolation

Russia swiftly took control of the factories left by Western corporations at the start of the invasion of Ukraine. Hopes for the revival of these plants rested on Chinese companies, yet they remain unconvinced by the proposition.

The Russian invasion of Ukraine has continued for over two years, with little sign that the conflict will end soon. Internationally, Russia has faced severe isolation due to sanctions, which have heavily impacted the domestic automotive industry.

The embargoes, coupled with the departure of European manufacturers, who nearly unanimously exited the country in the first few weeks following Russia's escalation of the war, have devastated the Russian automotive sector. The government promptly took further steps and, instead of inviting corporations back, simply seized the factories.

Owning production facilities is one thing — making effective use of them is another. Before the conflict, Russia produced about 1.5 million cars each year, a respectable volume. The market was indeed large, and everything seemed to indicate that Russia would soon become Europe's automotive hub. However, these prospects have now been shattered.

Russia has made several attempts to revive car production, aiming to focus on indigenous designs, with mixed success. Brands from countries less concerned with the war in Ukraine have also been invited. However, the profits remain slim — sometimes even too little to jump-start the seized factories.

Russia is pinning its hopes for improvement on a new automotive powerhouse — China. The Middle Kingdom is attempting to navigate the wartime turmoil by balancing its ties with the West and its alliance with Vladimir Putin. Doing business with Russia seems easier and the vast, untapped market appears to be an ideal target for Chinese brands.

However, Chinese companies are not particularly keen to engage in this cooperation. These corporations are not very interested in entering a Russian market that is more focused on seizing factories and car production. China wishes to continue expanding sales and fostering the growth of its most promising brands. In doing so, compromises with the USA and Europe are vital.

Relations, for instance between the EU and China, are already akin to navigating through a minefield. Entering the Russian market could represent a significant setback for brands aiming to expand into Europe. Moreover, operating in Russian factories simply isn't profitable for Chinese companies.

"I get the impression they somewhat overestimated their capabilities," - a Russian analyst Sergei Burgazliev explained to Bloomberg regarding the approach of two automotive giants who acquired factories after Mercedes, Hyundai, or Volkswagen left. It's possible that without substantial compensation from the government, the last hope in the form of China could fade away, leaving Russian firms to struggle for survival.